It’s a bluff: Predatory franchising is an antiquated technology

July 30, 2009

WizardofOzThe industry elites know it’s curtains for predatory franchising.

What gave them power (litigation) has been stripped away.

Oh and the financial institutions (especially the government guaranteed loan program administrators) are very, very nervous about being past the tipping point.) They know what lenders’ due diligence duty is.

The old software was based on the economics of scarcity and is hopelessly, helplessly out-of-date.

Advances in  communication (bandwidth, storage & processing) have smashed the franchise bar’s closely-held monopoly on how franchising really works. What they charged $300 per hour for, is now largely available for free here, Blue MauMau or WikiFranchise.org.

It seems ironic that their crowning jewel (intellectual property) has been used against them.

Search a:

  1. tradename tag cloud or
  2. tradename directly (ie. McDonald’s or Quiznos), or
  3. name of a franchising executive.

Immediately, 100% anonymously and for free, this reveals what they had so successfully charged for  concealing in the past.  High-quality information, immediately available with the promise/threat of 1,00s of semi-anonymous contributors writing on WikidFranchise via personal narratives.

The true costs of opportunism (reduction in negative externalities) is more accurately being assigned to tradenames and and the individuals who control them. What we were told was random, now appears as it really is: a well-thought out system that is repeated all over the world. Designed as precisely as any Swiss watch.

  • The goal?: to re-distribute (not create) capital.

The King Experts, the thought-leaders  know this. The Fixers denied, got angry, bargained and then got into a major league funk in the last 10 years.

They now accept that putting the internet back in the bottle is impossible.

  • It is a revolution.

Franchisees need to walk into an empty room and go about their business of making money since the law has become irrelevant. The curtain has been pulled back.

Frightened, old fools: more to be pitied than ever feared.

What is current, has currency with politicians.


MBE, The UPS Store executive behind bars

February 24, 2009

I started looking closely into franchising in 1998.

One of my first big system investigations was Mail Boxes Etc., MBE. Since then, that system has morphed into The UPS Store brand and can be followed on Blue MauMau’s thread called The UPS Store, Tales of Gore.

The photograph above is of the president of MBE Canada Michael Martino. He was chairman of the Canadian Franchise Association, CFA and spoke at the International Franchise Association’s, IFA 46th annual convention in 2006.

In December 1998, Martino appeared as a part of an article by John Lorinc in Canada’s monthly national business magazine (The Report on Business). Lorinc, an award-winning  journalist, wrote a very interesting 1995 book called OPPORTUNITY KNOCKS: The Truth About Canada’s Franchise Industry which is still available on used book websites. I recommend picking it up.

The accompanying article was called The Sure Thing: Peter Thomas thought he’d bought into a can’t-miss franchise. That was $170,000 ago.

Here is a pdf of the article, courtesy of my Information Sharing Project archive.

Doug Forster took the photograph. We both agreed that franchise executives, as a general rule, should not allow themselves to be posed behind bars.

  • Especially when you read the contents of the article.

Peter and I were sitting beside each other in the Legislative Assembly of Ontario when our first franchise law was passed in 2000.

I sometimes wonder what happened to Peter and to Mr. Martino over the last 10 years.

Anyone know?

UPDATE: A direct link to Lorinc’s article is now available on WikiFranchise.org. I’ve also lost touch with Peter since the Ontario franchise law was passed. Hope he is well.


What happens when franchisees turn off the Cash Flow tap?

February 19, 2009

tapI do not know, precisely.

But the greatest “winners” may very well be those that  turn it hard off, immediately.

I think anyone with any skin in the franchise game should be re-thinking their assumptions very carefully, right now. With their peers and with a commercial lawyer.

I wrote over at Blue MauMau that I thought franchising was undergoing a crisis of confidence. FuwaFuwaUsagi seems to agree.

This distrust is really different in four ways:

  1. it is for all franchises (not Brand A or Brand B),
  2. systemic (affects all brands),
  3. cataclysmic (most systems underwater in one year?)  and
  4. it is from the franchisor’s lending associates (not franchisees).

This is fundamentally different than in any other time in franchising’s history. Pay attention.

How an Industry Adapts into Into It’s Own Destruction

Unfettered capitalism is exceptionally efficient in allocating resources, maximizing ROI. But capitalism has some very nasty byproducts (externality: spillover costs). Fraud is a well-known example of an externality that markets, alone, cannot correct for. We are seeing now the carnage of short-term only incentives. Totally predictable, totally understandable.

1. Once upon a time, franchisors acted responsibly and achieved an adequate return on investment, ROI. They invested in real industries with competent managers and franchisee partners. Col. Sanders, Ray Kroc.

2. A franchisors decided to cheat. They pushed the opportunistic envelope by treating slaughtering instead of shearing investors. They made a higher ROI than the less sharp franchisors because it is always more profitable to steal than to earn money.

3. A sophisticated understanding, “conspiracy”, cabal was knit together with the franchise bar, suppliers, lenders, regulators, and the media (Big Franchising). There is never any reason to write down anything: each independent party is simply acting in their self-interest by peddling these false franchises. Of course, short-cyclers always cut the apple trees down for firewood instead of caring into the long-term.

4. The public still believed that franchising was Ok but with a few rotten apples. Over time, though, greater doubts were raised even though the information monopoly still was holding.

5. The influence of the few innovator franchisors and Big Franchising grew and grew.  It was going very, very well: no one suspected a thing and the sheep were as docile as anything. Only the chumps didn’t adapt by becoming tyrants themselves. Everyone made out like bandits that was wise to what became more and more to resemble a confidence game or ponzi scheme.

6. Then came the internet and lower-cost sharing of information. This would be technological revolution that not change but destroy the credence good monopolists’ power.

It’s over because their own greed and hubris will result in wholesale investor defections lead by non-franchise bar solicitors.


No funds, No franchising — No Future

February 19, 2009

sewer12More signs that franchising is dying. And dying quickly.

  • But they will be happy to accept you money if you’re foolish enough to throw it down this sewer.

Of course, no industry pundit would ever say that mom and pop franchising has become so corrupt, predatory and cynical that it is close or near death. Everything is always :).

This has nothing to do with any credit squeeze.

That’s a pretense or excuse. The real, much more fatal situation is that Joe Public has had enough and is rejecting any system offered, outright. Enough people have wised up to the con of all systems.

An important article over at Blue MauMau called No Funds, No Franchising. Sometimes the truth does slip out from an anonymous sources:

The risk is that we, as a group of industries, may be in trouble. Franchising moves on loans, the life blood of the business.

Without franchising [the selling of franchise units], a franchise brand is simply running an existing system of stores that pay little. And those stores are usually slow to pay royalty and product when times are difficult.

Franchising must keep building new units to stay in the game. Otherwise the business model does not work.

This is an admission that the ponzi-like reliance on new money to prop up a fraud is what franchising has largely become.

Other than franchisors self-financing (not very likely) what is the timeframe for this collapse?

If something does not happen [to loosen this credit crunch] we will see franchising in general flat on its back before year’s end.

…before year’s end…

Anyone thinking of buying into a franchise or renewing one should heed these words: you will be paying money into a corpse by year’s end.

Those that continue to be good little girl and boys and pay Daddy every month, well, that’s your choice.


Trade Show activism: Counterspin the Lies on their Selling Field

February 11, 2009

franchiseshowThis ad appeared in today’s Toronto Star.

Just a few points:

1. Contrary to the heading, you do not “buy” a franchise. You sink cash into this type of business opportunity and hope to achieve a salary and ROI over the life of your license of using the trademark using a promised “proven system”.

2. Small business is always a lot harder than you’d ever think. It takes years to develop the technical, management and decision making skills to be a success. Often the cash burn rate in franchising is so great that you never get to see profitable times: You simply flame out too early.

3. Your first contact with a trademark franchise system should never be at  a trade show. You are at a very big disadvantage at a trade show: they control the atmosphere, appear much more successful than they actually are and give the false sense of being in a group of profitable businesses.

Big Show costing Big Dough: National franchise associations such as the Canadian Franchise Association rely very heavily on the revenue that these shows deliver. These types of shows are ground-zero in the subtle and not-so subtle art of persuading mom and pop investors that the next franchise will make them a millionaire.

In 1998, I showed up with a CBC television crew to the fall CFA show. We handed out pamphlets warning attendees, intercepted the minister as he was exiting from his franchisor rah-rah speech (the last time an Ontario minister showed up, I think) and barged our way into the trade show to get some grip-and-grin footage with thinly smiling salespeople.

  • The CFA and their supporters were not amused.
  • Everyone pays a lot of money to bamboozle the next chump.
  • They certainly don’t need anyone coming to piss on their parade.

Their carefully planned PR news puff piece, was turned inside out: Toronto viewers instead saw a be careful of the predators out there story instead.

I guess it was predictable that Dan Farmer of the Royal Bank of Canada would insist that I never show up at another franchise trade show if I wanted financial support for the Canadian Alliance of Franchise Operators. I kept my word although I never saw $1 from any of the 5 banks that financially underlay all Canadian franchising.

In 1998 we had to convince a television editor to assign a reporter, a videographer, record, edit and then air the results. Tough getting media attention because franchise fraud is pegged as a niche audience item.

A little over 10 years later, someone just needs to:

  1. slip a digital camera in their jacket,
  2. record a few clips,
  3. use free edit software,and
  4. create and post YouTube video (I’ve already reserved a FranchiseFool channel, btw) that shows examples of how franchise salesmen openly lie at a trade show because the franchise agreements that give them a License to Lie, Cheat and Steal (kudos to Blue MauMau) from mom and pop investors.

Time trumps all franchise Fraud

January 28, 2009

michaelwebster

Con men understand very well when their targets are the most vulnerable.

It’s a game for them: Their comparative strength (trump) is knowing how to manipulate your human weaknesses for their profit.

With hundreds of billions of dollars being thrown into the world’s financial institutions with zero accountability, the risk of funding a franchise fraud  (in my mind) is be greater now than before the www recession.

Michael Webster at Misleading Advertising Law makes a very good point at his post, Selling Franchises to the recently Laid Off:

One of my concerns in this economic environment was with how the newly laid off would react, what they would do, and how they would make decisions.

With nearly 60,000 reported layoffs in the United States alone, it is of pressing concern that these individuals understand the how to avoid failing for the franchise fraud.

Michael provided some extremely useful advice in a recent Blue MauMau interview named, Fraud Expert Says Those Wanting to Be Own Boss Easily Scammed.

First, with high unemployment the blood is in the water for unscrupulous sellers:

With the economy seeing the highest unemployment figures in nearly four decades, Webster thinks once those unemployed have access to credit, there is the potential for record numbers to be ripped off. In order to avoid being swindled, his first piece of advice is to think of buying a business as one option among many investment opportunities.

Michael warns against getting out of the pan and jumping into the fire and relying solely on your own research, which can become distorted (confirmation bias):

WEBSTER: There are times in our lives when for whatever reason we want our aspirations to be achieved immediately. For many, the most compelling overriding value is the need to be in complete control of their economic lives. Simply put, they never want to be fired again.

Those people are sitting ducks.

The con criminals know this and wave phrases like “be your own boss” and “in business for yourself but not by yourself.” Prospects pick up on such words of puffery. Buyers blow it up into full-scale fantasies of business ownership. And then to compound the problem, they perform bad due diligence by sloppily selecting evidence that only confirms they are making a good decision.

You need a professional 3rd party to help you and you need to take your time.

A buyer should take their time – some six to eight months. Read the franchise disclosure document. Get the best professional help to explore the opportunity and its accompanying documentation. Ask questions. Do not jump! Get a part-time job doing anything if you need to so that you don’t feel like you have to buy this franchise. If the opportunity is any good, you’ll figure it out.

Time will trump all frauds.

Excellent advice from someone with great insight.  Michael had also suggested in previous posts to actually work for a franchisee within the proposed system for several to six months and that you should budget up to $5,000 for professional advice (on not only the contract but also the business deal).

Michael’s caution against being sucked into a phantom dream is very important. Follow his advice and this will greatly reduce your chance of experiencing a financial nightmare.


Abolish the SBA: $70-83B reasons why it should happen

January 12, 2009

veroniquedereymercatuscentre1Private gain, Public loss.

Banks, like all buisnesses, just love it when governments underwrite their risks.

It’s only a bonus when Joe Q. Public gets to pay for the drunkard’s binge of “aggressive” to predatory to outright fraudulent loan practices.

Canada, the United Kingdom and the U.S. all have small business loan programs which guarantees defaults.

The North American franchise industry relies very heavily on this debt program to fuel franchise sales. In Canada, the Canada Small Business Financing program is almost the only debt that Schedule 1 banks will offer for franchises (last time I checked).

The U.K. industry discernment is still embryonic. Their Small Firm Loan Guarantee scheme, SFLG is run by the Department of Business, Enterprise & Regulatory Reform, BERR. By the looks of  The Royal Bank of Scotland site, SFLG loans are a big part of the U.K. franchise industry also.

  • Blue MauMau is the most active centre for franchise investor concerns in the world. Tellingly, SBA Loans Free Fall is a current headline.

Dr. Veronique de Rugy, adjunct scholar at the CATO Institute in 2007 (and now senior research fellow at the Mercatus Center at George Mason University) presents some very important facts from a CATO Daily Podcast [see below].

Specifically the U.S. Small Business Act, SBA loan program:

  1. may end up costing citizens $70-billion (maybe $83-B?, if defaults climb faster than projected; unfunded debt that will be added to future taxpayers),
  2. with less than only 1% of small businesses taking out a SBA loan per year, it’s irrelevant economically,
  3. was created 53 years ago when credit information was much harder to determine (program has not evolved as information sharing has improved),
  4. of the loans that are currently on the books, they are “defaulting massively” (SBA loans disproportionally finance doomed business ventures), and
  5. only has 3% of women or minority-controlled firms take take out a SBA loan per year (as a social program it is a bust: 97% of these “discriminated against” groups get their debt elsewhere).

All of this begs the question: If the 7a Loans are defaulting like mad who exactly are benefiting from this program?

To her credit, Dr. de Rugy points directly to the banks and their capacity to sell off the 75% government guaranteed portion on the secondary market and stick the massive debt to the taxpayers if their own default projections are understated (ie. d/recession).

The banks love SBA loans (in a technical sense) because:

  1. 60% of all loans are underwritten by the 10 largest banks can exert market influence even within a very decentalized banking system, comparatively, (in Canada it’s worse: 82.5% all guaranteed loans with Top 5 bankers, 2000-05: FOI author) and
  2. the return on equity for is a minimum of over 3.8 times higher than for regular loans (SBA: 70% v. Regular loans 15-18%).

Listen to the 9:06 podcast and see how $70-billion could be added on top of the current +$700-billion banking bailout. I can’t help but note how fuzzy the banks are so far on accounting for the first bailout installment. [click here]

According to Dr. de Rugy, the SBA loan program serves two very powerful masters:

  1. “lawmakers who have successfully sold the SBA as a program to help the so popular small businesses and
  2. the banking industry, which profits by issuing and selling the low-risk, government-guaranteed small-business loans.”

As of the end of 2006, the SBA had nearly $83 billion in outstanding guaranteed loans that the taxpayers – not the banks – would have to pay if the economy experienced a serious downturn.

BANKING ON THE SBA: Big Banks, not small businesses, benefit the most from SBA loans programs, Veronique de Rugy, August 2007, 4 pages


A: I was a legal shill over at Blue MauMau

December 31, 2008

Q: Daddy, What did you do during franchising’s Great War of Words in 2008?

  • Rest of Father and Child franchise talk.

Q: Daddy, whats a shill?

A: Honey, I used my education, rhetorical skills and experience to confuse and deceive franchisee advocates in their attempts to improve themselves. I was what was a specialist : a digital apologist.

You lied for a living?

Not directly dear. I presented information on a selective basis [credence good cheater] that I knew would be misinterpreted by naive franchisees: lead them down into blind allies.

We sabotaged the building of trust between former franchisees by playing one off against the other.

So you lied by the things you didn’t say?

That’s right dear. Let’s not forget, this has more than paid for your college tuition. A few deadbeat banner ads could hardly cover any confidence game’s expenses [nut], now could they?

No Daddy, I guess they couldn’t. I love you Daddy.

I love you too.


Shocking franchisors into good behavior

December 29, 2008

cattleprod

People tend to behave better when the costs of misbehaving are increased.

As reported at Blue MauMau on December 28th, Bakers Delight is planning to sell more stores in the face of massive controversy (Bakers Delight Plans 150 New Franchises).

To wit:

Entangled in 2008 with government hearings over unfair franchise practices, franchise owner litigation, rumors of financial problems and the recent failure of its attempt to enter the U.S. market, Baker’s Delight remains undaunted. The Australia-based firm announced today that it plans to sell 150 new franchises in Australia, New Zealand and Canada. The statement did not specify when it plans to achieve this.

A well-known Australian franchise windmill tilter, Ray Borradale adds to the posting:

This would explain why the anti-Bakers Delight franchising website [www.bakersdelightlies.com] was purchased from the ex-franchisee who assisted to expose the reality of franchisor behavior and franchisee failures and did enormous damage to the brand.

Mr. Borradale goes on to make an offer that most unsettled former franchisees might want to consider:

I would suggest Roger Gillespie [BD’s CEO] doesn’t appreciate that the removal of that web site will do little to find him all his new franchisees; rather, it will increase efforts to ensure he continues to have major obsticles to contend with.  Roger is kidding himself.

He should learn from Midas; it don’t go on for ever baby. How many web sites does he want to buy?  Perhaps ex-BD franchisees can get their money back from Roger through a new entrepreneurial effort setting up sites and selling them back to him at $200k a pop?

Any BD people can contact me if they want some assistance.  It takes a huge effort for 24 hours and then a lot of money; less than $200 will get you started. [my emphasis]

An interesting idea: a few (dozens?) of websites and blogs, each watching, collecting documents and recording a specific franchisor’s every move. Providing and sharing information based on the [almost] no cost of the internet.

Using the network effect of the internet to short-circuit opportunism via former franchisees who are out to make a buck.

  • Private law ordering or digital vigilantism [depends on your viewpoint].
  • Hundreds of copy-cat anti-this trademark system, anti-that trademark systems?
  • Standardized indexing of a www web of national trademark nodes?
  • Organizing to defuse a type of organized crime [but on an electrical platform unlike the law which is strictly lead type].

Reflecting franchising’s unique strength (duplicatabiliy) onto a technology that can condition franchisors into good behavior [operant conditioning: voluntary fair dealings at the end of a cattle prod]. Interesting.

  • But, my God, where will it end? With just one AUS franchisor?

Maybe yes. Maybe no. The new year promises to be very interesting.

PS: This is a secret so don’t tell anyone. Homework: Start collecting everyone’s home email for future bulk emails.


Bhupinder “Bob” Baber

November 27, 2008

bobbaberIt was two years ago today that Bob Baber, a franchisee entangled in what seemed like an impossible legal mess, went into a bathroom and shot himself.

Janet Sparks of Blue MauMau reminds us and discharges her duties in her usual dignified and professional manner.

Where I’m from, we say je me souviens (I remember) and we mean it.

My thoughts and prayers are with Rattie and her and Bob’s family and friends.


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